Fannie, Freddie, and the Destructive Dream of the 'Ownership Society'

More than four years ago, President Obama assumed office promising
dramatic reform to the housing market. After all, it was the housing
market that triggered the financial crisis, and the vast proliferation
of low-quality loans that had fueled the housing bubble. But politics
delayed those reforms, and now the president is reopening the issue with
a call to wind down the two main federal mortgage agencies, Fannie Mae
and Freddie Mac. "For too long, these companies were allowed to make big
profits buying mortgages, knowing that if their bets went bad,
taxpayers would be left holding the bag," the president said this week. "It was 'heads we win, tails you lose.'"

Well, not entirely. The U.S. government and taxpayers did rescue
these agencies in 2009 (to the tune of nearly $200 billion), and, after
injecting them with capital and essentially nationalizing them, these
companies started to turn a profit as the housing market slowly
recovered. This month, they contributed more than $15 billion to the
U.S. Treasury, and have been one factor in sharply reducing government deficits.

Even more, Obama's targeting of Fannie and Freddie is part of a
larger narrative -- on both the left and the right -- that banks and
government colluded to produce the financial crisis and the continuing
drag on the United States. To be fair, Obama in the same speech this
week acknowledged that much of the housing crisis was the product of
"banks and the government...[making] everyone feel like they had to own a
home, even if they weren't ready and didn't have the payment." But that
chord is a decidedly minor one in a general atmosphere of blame.

Over the past decade, we have collectively spun a story of the
financial crisis. It goes something like this: in the 2000s, government
regulation of the financial system loosened as large banks, in collusion
with free-market ideologues in government, convinced regulators that
risk was a thing of the past. They then took advantage of easy money and
lax regulation and began to push mortgages to speculators and
low-credit individuals, who bought homes they couldn't afford. Those
mortgages were then packaged and used as the fodder for financial
derivatives, which turned bad loans into a global crisis. Meanwhile,
millions of people lost homes and jobs; the government spent hundreds of
billions to bail out the banks, and those millions of citizens were
left with shattered credit, no employment, and fractured communities
such as Detroit.

There is much that is true in this story. Its basic contours were repeated this week in the Justice Department case
against Bank of America over lax lending practices in 2008. And Fannie
and Freddie, independent agencies backed by the government, were the
linchpins, buying up those mortgages and providing a seemingly endless
backstop.

What's missing from the story is crucial, however. Obama alluded to
it in his speech, but he buried the details. Often neglected is the
degree to which so many felt that they needed to own a home. That wasn't
created by banks and government, even though it was encouraged. The
"ownership society" had been touted not just by President Bush in the
2000s, but by Clinton, Reagan, and by Americans of all parties and
ideologies since the founding of the republic. There is nothing more
"Jeffersonian" than owning your own land and home (and slaves...but that
is another issue). The United States pulled immigrants in part because
of the availability of land and the promise of independence that owning
land afforded. Freed slaves after the Civil War were promised -- though
not actually granted -- "40 acres and a mule" because having land was
seen as a necessary component to liberty and freedom.

After World War II, agencies such as the Federal Housing
Administration along with other New Deal creations such as Fannie Mae
(the Federal National Mortgage Association) spurred more widespread home
ownership, with returning GIs both swarming into colleges and then into
vast new housing developments in the suburbs. Freddie Mac (the Federal
Home Loan Mortgage Corporation), founded in 1970, was meant to augment
that process with even more quasi-government intervention in the
mortgage market, with the goal of reducing the risk local banks might
incur in making new home loans.

These programs then combined with banks to produce the increase in home ownership, from 62 percent in the 1950s to almost 70 percent in the 2000s.
The programs worked not because the docile masses were convinced to own
homes but because the drive to have a home is deeply embedded in
American culture (and many other cultures as well). Government and banks
facilitated the realization of these desires, but it is beyond a
stretch to claim that they created those desires. They stoked them, and
often took advantage of them, but they did not implant and create them.

That part of the story is sadly, thought understandably, overlooked
and underplayed. Targeting government ineptitude and Wall Street greed
is a far better sell politically, and a better sell for the media, than
speaking of collective responsibility for our dreams trumping our means.
Aiming for a home, holding that as a goal, and living in a society that
allows for the potential to meet it are powerful and productive fuels.
But succumbing to the easy lure of a promise too good to be true, which
was what many of those mortgages in the 2000s were, required multiple
breakdowns, one of which is individual desire clouding judgment.

The easy story of what happened over the past years is now in danger
of becoming a set "truth." It is so often repeated that it often goes
unquestioned. But while that story has much to offer, it entirely elides
how our individual desires, combined with a long history driving us
toward the supreme value of owning a home, were vital ingredients in our
recent fate. That story also infantilizes "the American people" by
suggesting that so many of us were dupes and rubes, easily manipulated
by government and business into making bad choices.

Blaming venal banks and inept government will not transform our
system, however satisfying it may feel. Shuttering Fannie and Freddie
will not force a shift in people's desires, though it will make it
harder for banks to prey on those desires. Ending the government
guarantee of mortgages via these agencies will lead to tighter credit
standards, and hence less access to credit for those less well-off. That
may be for the best, but it is hard to see that not generating
backlash. Rather than unwinding these agencies, we should focus on those
lending standards, and when they should be relaxed and when not.

Overall, we would be better served by understanding that many of the
struggles of recent years stem from a mismatch between what we dream of
and what this system is currently able to provide. Some of the gap is
due to bad regulation, Wall Street greed, and speculation. Much of it,
however, is due to a radical change in our economies that has upended 20th
century industries and jobs and continues to do so. Responding to that
change and recalibrating our expectations without giving up our dreams --
that is where our focus should be, and must be.